- 102 firms formally warned SRA they were unable to find PII cover
- Number would have been even higher without fall in premiums
21 UK law firms were forced to close this year (year end June 30 2024)* due to their inability to obtain professional indemnity insurance.
A total of 102 law firms contacted the SRA last year to notify them that they were having serious difficulties in finding PII coverage.
Professional indemnity insurance (PII) is a type of insurance to cover law firms in the event of a claim being brought against them and it is a mandatory requirement for law firms to have PII coverage in order for them to practise.
Obtaining PII is one of the top annual expenses for law firms, alongside staffing, IT and property costs. The cost of PII cover for some law places them at greater risk of insolvency if PII premiums increase.
Firms that are heavily reliant on residential property conveyancing, which is seen as higher-risk by insurers, are amongst those most at risk of being unable to obtain affordable PI insurance. .
The number of law firm closures would have been higher had it not been for the entry of new insurers into the market, which has led to a reduction in insurance premiums. Research by insurance broker Howden found that 66% of its law firm clients saw a decrease in premiums in the key October insurance renewal period in 2023**.
Ian Johnson, Partner, says: “The number of law firms closing due to the inability to source affordable PII cover is still a big problem. Insurance costs have been a worry for law firms ever since the Global Financial Crisis.”
Ian Johnson says that the struggle to get PII cover is affecting succession planning at some firms, and in particular smaller firms, where insurance costs can be disproportionately high.
Says Ian Johnson: “Some firms that have a large conveyancing offering are facing a particular struggle to find the next generation of partners. A lot of younger lawyers see that fight to get insurance cover while staying profitable and ask why they would want to become a part of that business model. The property market can be particularly sensitive to shifting economic conditions and that makes the risk even more difficult to justify for many”
A rise in M&A activity in the legal profession has seemingly pushed down the number of insurance-driven firm closures. Smaller firms that struggle to secure PII are being acquired in ever growing numbers and that offers a viable alternative to simply closing their doors. This becomes even more attractive as the cost of obtaining insurance run off cover when closing a firm will usually make a simple closure without a successor practice impossible to fund. The number of law firm mergers has begun to increase again in recent years from a ten year-low of 99 in 2021 to 121 in 2023.
* Source: Solicitors Regulation Authority
** Source: Howden Market Report January 2024
